Once Again, Noodles Is No Chipotle

Investors buying into Noodles & Co. (NASDAQ: NDLS) as the new Chipotle Mexican Grill (NYSE: CMG) may want to recheck that buy thesis.

Shares of the fast-casual chain specializing in a global array of noodle-based dishes slipped after posting disappointing quarterly results at Wednesday's market close. Revenue rose 15% to $88.9 million, but that was well short of the 18% advance that analysts expected. The top-line growth was fueled largely by the concept's brisk expansion as systemwide comps rose a mere 2.1% for the quarter. It's not a good thing when you can barely keep up with inflation at the unit level. It's also a bit surprising given the bump that brands often get after they go public. Noodles & Co. went public at $18 at the end of June, making this its first complete quarter as a public company. The IPO's success alone should've attracted diners in larger numbers. Adjusted earnings did climb at a 45% clip, but that simply matched Wall Street's profit target.

Just for comparison's sake, keep in mind that the much larger Chipotle grew its sales at the 18% clip that Wall Street was betting Noodles would duplicate during the same three months. It didn't happen. Chipotle's comps rose 6.2%, or nearly three times what Noodles served up. Chipotle's further along in the growth curve than Noodles, but it's still apparently open to outrunning the younger challengers to its fast-casual throne.

Four months ago, I argued that Noodles & Co. was no Chipotle based on where each company was at the time of its IPO. Even though the initial pop sent both valuations above $1 billion, there was really no comparison.

Chipotle had 489 restaurants by the end of 2005. Noodles had 276 eateries at the end of 2012.

Revenue at Chipotle climbed 33% to $627.7 million that year, while Noodles' sales climbed 17% to $300.4 million last year.

Chipotle had posted eight consecutive years of double-digit comps heading into its debut. Systemwide comps at Noodles have grown 3.7%, 4.8%, and 5.4% in its three most recent fiscal years.

Was Noodles -- growing slower and half the size -- worth nearly the same as Chipotle when it went public? Of course not.

Noodles is certainly better than most chains out there, and that would be good enough to justify it as a portfolio consideration if the valuation weren't so inflated. Noodles closed Wednesday at a steep 85 times next year's projected earnings. This is still a growth stock worth watching. The average store isn't raking in the kind of money that Chipotle's ringing up, but the concept is unique enough to stand out in what has become a crowded field of fast-casual players straddling the fence between casual dining and fast food.

Noodles & Co. expects comps growth to accelerate to roughly 4% in the current quarter. That's good. However, its full-year top-line guidance of $348 million to $352 million is short of expectations. That's bad, of course, but let's give the carb cooker a few quarters to show that it can grow quickly enough to earn its premium valuation.

Noodles & Co. is not the next Chipotle, but that doesn't mean it can't serve up hearty gains if it can live up to the story stock hype.

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As a former owner of a bunch of highly successful fast casual restaurants, I can tell you going forward the Chipotle model is far easier to ripoff and therefore become cannibalized than the Noodles model. Look at Chipotle's competitors (Qdoba, Moes Southwest Grill, California Tortilla, Tiajuana Flats, Free Bird, etc. etc.). Can you even name a direct competitor to Noodles that has more than 20 restaurants in the U.S? I'll be shocked if in five years the growth of Noodles doesn't dwarf what Chipotle will do in the next 5 years.